Economic Unit 2 Review

Chapter 4.1 – What is demand?

• Demand – combination of desire, ability and willingness to buy a product
• Microeconomics – part of economics that studies small units, such as individuals and firms

An introduction to Demand

• Market economy – economic system in which people and firms make all economic decisions
• Demand schedule – a table that lists how much of a product consumers will buy at all possible prices
• Demand has two variables: price and quantity
• Demand curve – a curve that shows the quantities demanded at all possible prices

The law of demand

• Law of demand – rule stating that consumers will buy more of a product at lower prices and less at higher prices (inverse relationship)
• Market demand curve – a curve that shows how much of a product all consumers will buy at all possible prices

Demand and marginal utility

• Marginal utility – additional satisfaction or usefulness a consumer gets from having one more unit of a product
• Utility – the pleasure, satisfaction, or benefit a person receives from consuming a product
• Diminishing marginal utility – decrease in satisfaction or usefulness from having one more unit of the same product

Chapter 4.2 – factors affecting demand

Change in the quantity

• Change in quantity demanded – movement along the demand curve showing that the amount someone is willing to purchase changes when the price changes
• Income effect – that part of a change in quantity demanded due to a change in the buyer’s real income when a price changes
• Substitution effect – that part of a change in quantity demanded due to a price change that makes other products more or less costly

Change in demand

• Change in demand – shift of the demand curve when people buy different amounts at every price
• Changes in consumer income can cause a change in demand
  • Normal goods – direct relationship
  • Inferior goods – inverse relationship
• Change in consumer tastes and preferences can cause a change in demand (direct)
• Substitutes – competing products that can be used in place of one another (direct)
• Complements – products that increase the use of other products (inverse)
• The way people think about the future can affect demand
• The market demand curve can also change if there is a change in the number of consumers (direct relationship)

Chapter 4.3 –  elasticity of demand

• Elasticity – a measure of responsiveness that shows how one variable responds to a change in another variable

Demand elasticity

• Demand elasticity – a measure that shows how a change in quantity demanded responds to a change in price, determined by time, substitutes, income
• Elastic – type of elasticity where a change in price causes a relatively larger change in quantity demanded
• Inelastic – type of elasticity where a change in price causes a relatively smaller change in quantity demanded
• Unit elastic – type of elasticity where a change in price causes a proportional change in quantity demanded

The total expenditures test

• Total expenditures = price (quantity demanded)
• If a business can determine a new product’s demand elasticity, it can find the price that will maximize total revenues

Determinants of demand elasticity (if yes: elastic, if no: inelastic)

• Can purchase be delayed?
• Are adequate substitutes available?
• Does purchase use a large portion of income?

Chapter 5.1 – what is supply?

• Supply – amount of a product offered for sale at all possible prices
• Law of supply – principle that more will be offered for sale at higher prices than at lower prices

An introduction to supply

• Supply schedule – a table showing how much a producer will supply at all possible prices
• Supply curve – a graph that shows the different amounts of a product supplied over a range of possible prices
• Market supply – a graph that shows the various amounts offered by all firms over a range of possible prices
• Quantity supplied – amount offered for sale at a given price
• Change in quantity supplied – change in amount offered for sale when the price changes

Change in supply

• Change in supply – situation where different amounts are offered for sale at all possible prices in the market; shift of the supply curve (direct relationship)
• A change in the cost of productive inputs such as land, labor, and capital can cause a change in supply
• Increase productivity, more output is produced at every price, which shifts the supply curve to the right
• New technology tends to shift the supply curve to the right.
• Taxes increase causes the supply curve to shift to the left
• Expectations about the future price of the product can also affect supply
• When the government establishes new regulations, the cost of production can change, causing a change in supply
• A change in the number of suppliers can cause the market supply curve to shift to the right or left

Elasticity of supply

• Supply elasticity – a measure of how the quantity supplied responds to a change in price
  • Are resource inputs readily available?
  • Are factors mobile – are workers prepared to move to where they are needed?
  • Can finished products be easily stored, and are they existing stocks?
  • How long and complex is the production cycle or production process?
  • Time is the sole significant determinant of price elasticity of supply
• The three elasticities

Chapter 6.1 – prices as signals

• Price – monetary value of a product as established by supply and demand
• High prices signal buyers to buy less and producers to produce more, vice versa

Advantages of Prices

• Prices are neutral, they favor neither the producer nor the consumer
• Flexible
• Most people have known about prices all their lives
• Prices have no cost of administration

Prices as a system

• Not only help individuals make decisions; they also serve as signals that help allocate resources between markets
• Rebate – partial refund of a product’s original price
• Alternative to the price system – rationing – used in command like economy (problems below)
  • Equity/fairness
  • Administrative cost
  • No incentives
  • Inefficient/opaque

The price adjustment process

• Market economy are voluntary, compromise settles differences between buyers and sellers
• Economic model – a simplified version of a complex behavior expressed in the form of an equation, graph, or illustration
• Equilibrium price – price where quantity supplied equals quantity demanded
• Surplus – situation where quantity supplied is greater than quantity demanded at a given price
• Shortage – situation where quantity supplied is less than quantity demanded at a given price

Explaining and predicting prices

• Change in supply and or demand may occur based on situations
• These changes affect price
• Whenever supply or demand for a product fluctuates, the elasticity of the two curves affects the size of the price change

When markets talk

• Markets send signals in that they speak collectively for all the buyers and sellers who trade in the market
• Talk when prices move up or down significantly in reaction to events that take place elsewhere in the economy

If we have helped you, please help us fix his smile with your old essays...it takes seconds!

-We are looking for previous essays, labs and assignments that you aced!

-We will review and post them on our website.
-Ad revenue is used to support children in developing nations.
-We help pay for cleft palate repair surgeries through Operation Smile and Smile Train.

Find out More